Steps Taken to Address Legacy Costs

Steps Taken to Address Legacy Costs Over the Years

As a part of the community engagement process earlier this year regarding the City of East Lansing’s ongoing financial challenges, a number of community members expressed an interest in learning more about the steps the City has taken over the years to address pension and healthcare obligations.

Steps to Address Pension Obligations

The City’s efforts to address rising pension costs date back to 1999, when new City employees, with the exception of police and fire personnel, were moved from defined benefit plans to defined contribution plans. Following this, in 2010, new and current non-public safety employees had the option of moving to a Hybrid Plan (a combination defined contribution and defined benefit plan), which was identified by the State of Michigan as a cost-controlling plan under the Economic Vitality Incentive Program (EVIP). The following year, in 2011, the defined benefit plan for all police and fire new hires was significantly reduced, including a decrease in the plan multiplier from 2.75X to 2.25X, changes to overtime pay and vacation/leave time for final average compensation (FAC) and raising the retirement age from 50 to 55. Defined benefit plans for public safety employees, while significantly reduced over the years, have been maintained for a number of reasons:

Due to the physical nature of public safety careers, police officers and firefighter/paramedics need the option of retiring at age 55 or younger.

Police officers’ and firefighter/paramedics’ earnings from their jobs are not covered under Social Security.

Defined Benefit plans for public safety remain in place in the majority of other Michigan communities. Offering defined benefit plans helps the City to remain competitive in attracting and retaining high-caliber public safety professionals who provide important life safety services to the community.

In addition to the reforms listed above, it's important to note that several employee groups have had employee pension contributions in place since the 1990's and many of those contributions have increased over the years. The City also has made $4 million in supplemental pension payments over the last three years (in addition to annual required contributions) in an effort to begin closing the gap on rising pension costs. These costs have continued to increase over the years due in large part to the recession and below-average market returns. It should be noted that the City’s pension plan was 80% funded in 2003 and is 50% funded today.

In spite of these steps, the City's pension challenges have persisted. Pension costs have continued to increase over the years due in large part to the recession and below-average market returns, which has widened the City’s pension plan funding gap despite the required and supplemental payments that have been made. The City’s pension plan was 80% funded in 2003 and it’s 50% funded today. Because fulfillment of pension obligations are a Michigan Constitutional requirement, the City does not have a choice in whether it makes its pension payments. Additionally, MERS (the Municipal Employees’ Retirement System)
has shortened the amortization period for cities, meaning there is a deadline, at which point the pension plan must be fully funded. In the City’s case, it’s the end of Fiscal Year 2041. This deadline is one cause of the increase in the City’s yearly required contributions, which were $6,367,446 in 2017 and are estimated to be $6,883,452 in 2018 and $7,584,444 in 2019.

Steps to Address Healthcare Obligations

The City’s efforts to address healthcare costs date back to 1993, when retiree healthcare was eliminated for the majority of new hires. In its place, a healthcare savings account was implemented. Additionally, a Healthcare Task Force was created in 2000 and remains active today. This group, consisting of both union and non-union employees, works together to keep rising healthcare costs at a minimum (under the State’s hard caps) by engaging in a competitive bidding process with healthcare providers each year.